An SME is a company with fewer than 500 FTE staff that satisfies at least one of the following conditions: revenue less than €100m / balance sheet assets less then €86m. Only SMEs can access the SME scheme. Under the SME scheme the rate of relief can be as high as 230%. Lossmaking SMEs have the option to surrender some of their losses for a payable cash credit from HMRC. A Large Company is generally one with 500 or more FTE staff, or one with under 500 staff but revenue greater than €100m and balance sheet assets greater than €86m. SMEs may need to claim under the RDEC scheme, under certain conditions.
The Research and Development Expenditure Credit (RDEC) scheme has been introduced for any R&D expenditure being claimed under the large company scheme as of 1st April 2013. It allows large companies, and SMEs forced to claim under RDEC, to obtain a payable cash sum, if they are loss-making or an offset of tax payable if they are profitable. It replaced the Large Company Scheme with effect from 1st April 2016. The value of the ATL tax credit is 13% of qualifying R&D expenditure. However, as this is “above the line” the credit is subject to corporation tax.
Encouragingly, R&D is still deemed to have taken place whether or not the project is actually successful: it’s the “seeking” that counts.
Having established that you have eligible activity, it's then all about what you have spent. Here we look at some of the different types of costs that can be included in and R&D tax relief claim.
SMEs can often claim for subcontractors involved in their R&D projects. However, this can be a complex area. ABGI Innovation Funding Consultants are trained to help our clients to work out which subcontractors they can claim as eligible and which they must exclude.
Companies can claim for items that are used up in the process of R&D, such as chemicals, materials, batteries and certain forms of tooling. These costs can be significant for prototypes* and ‘first in class’ items, and it is important that clients do not claim too much.
Construction of a prototype can be treated as ‘directly contributing’ to seeking an advance in science or technology, but only if it is created solely for use in the R&D. It’s important that the prototypes are actually scrapped. If you end up selling them, they will not be considered part of the R&D project.
If Large Companies fund independent research by charities, education institutions or health service bodies, these payments can be eligible for relief.
Companies often buy software to allow them to conduct, project manage or report upon R&D projects. This software can be claimed as eligible. Note that this is distinct from companies that are developing their own software in projects which may or may not contain eligibility.
These are workers that have been paid through an agency. In practice EPWs are:
Just because a company is subcontracting work doesn’t mean that it is necessarily subcontracting R&D or even the routine work required to support its R&D. It may not have any R&D at all!
Under the SME scheme, 65% of the payments to subcontractors can be claimed except if the SME is connected to its subcontractor (e.g. is its parent, part of the same group, or are under common control). The rules are different for connected subcontractors.
Under the RDEC scheme, payments to subcontractors cannot be claimed except if the Large Company’s subcontractor is a university, college, charity, research organisation or health service body.
There is no requirement that the subcontractor should be in the UK. However, it is important that the subcontractor must be engaged to perform a specific task rather than providing a service.
Direct staff are those involved in core development work as described in the technical report. Indirect staff are those involved in work to support the direct staff, and typically work in Finance, Admin, Maintenance, Personnel and Training.
Payments made to people who volunteer to participate in clinical trials can be eligible.
For loss-making SMEs, the payable cash credit is not treated as taxable income. For loss-making Large Companies, the payable cash credit ( see RDEC section) is treated as taxable income.
Companies that paid tax in the previous two years can roll back the relief to get a rebate of Corporation Tax. (This is tax they would not have paid if they had made the claim at the time.)
That can be carried forward. Some companies will have no option but to keep the relief for use in future years and others will choose to do so because they are confident that they will be paying tax at a higher rate in the future.
We have former HMRC inspectors in our ranks. You have access to a level of insight hard to find elsewhere and confidence thatyour R&D tax credit claim meets HMRC’s expectations.
We are a firm of chartered tax advisers, but we also have engineers, scientists and software experts amongst our ranks too. So whatever your field, our team of specialists will help you to identify all of your R&D projects and costs.
We can help strategically map out a business plan in order to maximise future R&D claims. Taking a proactive approach, you can make better-informed decisions and unlock your business a greater level of funding
We handle your R&D tax claim from start to finish, taking up just a few hours of your time..
There are absolutely no upfront fees. We are confident of delivering value to our clients, we offer our R&D tax services on a success fee-only basis.
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